Month: December 2020

Berkeley has called on the government to make a cut in the tax on property transactions permanent, warning that the pandemic and Brexit still risked inflicting damage on a housing market that has so far emerged relatively unscathed from a year of economic turmoil.

The country’s homebuilders have been big winners from a reduction in stamp duty the government introduced in July to help the sector weather the economic disruption from the pandemic. However, the cut in the tax, which is paid by homebuyers, is due to expire in the spring.

“It’s proven that stamp duty is the most awful tax,” said Berkeley chief executive Rob Perrins. The holiday on the tax “should be indefinite”, he added.

The warning from Berkeley, which is a London-focused developer, came as the group forecast that its annual pre-tax profits would be about £500m, little changed from a year ago.

For the six months to the end of October, its pre-tax profits fell 16.6 per cent to £230.3m. The home builder’s revenues dropped 3.8 per cent to £895.9m, as it sold 1,104 homes in the period for an average price of £799,000.

Electrified by the reduction in stamp duty and enjoying a surge of demand that had been pent-up during the spring lockdown, home sales and prices have climbed at record rates in recent months.

Under the Stamp Duty holiday, buyers are spared from paying tax on the first £500,000 of any home or land purchase. The previous threshold at which the tax kicked in was £125,000, or £300,000 for first-time buyers.

However, some fear the market will tumble in March when that holiday is set to end.

“The coming months will see further evidence of the impact of Covid-19 on the economy, including the impact of the second national lockdown and tapering of government support and stimuli,” Berkeley said on Friday.

The company is “very conscious of the cyclical nature of the housing market, the stability of which is closely linked to consumer sentiment”.

As well as continued fallout from coronavirus the market was likely to be hit by Brexit in the coming months, said Berkeley, which is working with its suppliers to mitigate the disruption.

Nonetheless, Berkeley reaffirmed that it would return £280m to shareholders this year.

Berkeley is being “sensibly cautious, not overly worried”, said Aynsley Lammin, an analyst at Canaccord Genuity, who added that the company’s net cash of £954m gave it some protection against a sharp downturn in the housing market.

Mr Perrins said the company remained committed to London, despite fears the pandemic would lead to an exodus from the UK capital as working from home allows people to seek larger, more affordable homes elsewhere.

Berkeley invested £400m in three London development sites during the period.

Tony Pidgley, Berkeley’s founder and regarded as one of the most astute readers of the London property market, died in June. He had been chairman of the company until his death aged 72.

House prices in the UK rose sharply in September as pent-up demand and government measures to protect residential property from the economic shock of coronavirus led to a surge in transactions.

The average house price in the UK increased 4.7 per cent in the year to September 2020, up from 3 per cent in the year to August 2020, according to the Office for National Statistics’ seasonally adjusted house price Index.

The average house price hit a record high of £245,000 across the UK and £496,000 in London in September.

The rise shows the impact of the suspension of stamp duty — a tax on the purchase of homes — introduced by the government in July, as well as the release of pent-up demand after the spring lockdown.

“What began as a disastrous year for the property industry has been turned on its head by government interventions, creating a surge of demand,” said Paul Stockwell, chief commercial officer at Gatehouse Bank.

He noted the increase was the greatest in England and Northern Ireland, where stamp duty was suspended for transactions up to the value of £500,000 compared with £250,000 in Wales and Scotland.

The ONS said the pandemic may also have prompted buyers to “reassess” their housing preferences by looking to move to larger properties with gardens. Data showed the average price of detached houses rose 6.2 per cent, while flats and maisonettes increased 2 per cent.

September’s index, which because of a time lag between agreed and completed sales reflects transactions that began six to eight weeks ago, is the clearest indication yet that the stamp duty cut has succeeded in buoying house prices amid the economic turmoil of coronavirus.

But analysts warned that the boost could be temporary if unemployment continues to rise after the stamp duty break ends in March.

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said prices would likely rise over the coming months, but economic weakness and rising borrowing costs would mean prices risked falling without further government intervention.

“High mortgage rates partly reflect lenders taking advantage of the surge in demand, but they also reflect a re-pricing in response to the deteriorating labour market, which will endure after demand has softened,” he said.

“Prices, therefore, look destined to fall back next year, if the stamp duty holiday ends in March as planned and no other government policies change.”

The prime minister last month alluded to vague plans for long-term fixed-rate mortgages, worth 95 per cent of a property’s value, which could be offered to first-time buyers to boost home ownership beyond the stamp-duty holiday.

But banks said the proposals risked exposing customers to unsustainable debt, while making it more costly for them to buy property by driving up house prices.

Families charged inheritance tax (IHT) on gifts has climbed for three years in a row, as more people fell foul of complicated rules.

HM Revenue & Customs this week revealed an increase in estates liable for IHT on gifts — up from 873 estates in 2015/16, to 920 in 2016/17 and 993 in 2017/18.

The tax charged on gifts rose from £135m in 2015/16, to £156m in 2016/17 and £197m in 2017/18, the latest year for which data is available. Altogether, £5.2bn was raised in 2017/18 from 24,200 estates.

The disclosure follows a grim projection from the Office for Budget Responsibility which forecast last week that the number of estates subject to IHT will rise due to the pandemic from 25,200 in 2019/20 to 30,400 in 2020/2021.

Becky O’Connor, head of pensions and savings at Interactive Investor, a platform, said: “Many families of older UK people who died from coronavirus could now face unexpected inheritance tax bills on their estates. Many of those who died unexpectedly will not have had time to plan their affairs.”

Zena Hanks, partner at accountancy firm Saffery Champness, which made the FOI, said rising asset prices and a decade-long freeze in the IHT threshold was drawing “unsuspecting” taxpayers into the tax.

IHT is charged at 40 per cent on estates worth more than a £325,000 threshold — a figure which has remained the same since 2009.

Many wealthy individuals are advised to give away assets during their lifetime to avoid facing a large IHT bill, as certain gifts can be entirely tax free. These include gifts between spouses, regular gifts made out of excess income or a £3,000 annual gift allowance.

Meanwhile, under a system known as the seven-year rule — assets gifted during an individual’s lifetime are excluded from IHT if the person lives at least seven years after making the gift. The IHT liability is tapered according to when the gift was given, with the maximum 40 per cent levied on gifts made less than three years before death, falling to 8 per cent on those made six to seven years before death.

The FOI revealed increasing numbers of beneficiaries are paying IHT on such gifts. Advisers said this was probably due to the complexity of the poorly understood rules and benefactors dying within seven years of making the gift.

“Many individuals who make gifts during their lifetime are unaware of the various available allowances and exemptions, let alone that their gifts could end up coming back to bite their beneficiaries in the form of a hefty tax bill,” Ms Hanks added.

She urged would-be benefactors to keep detailed records of the amounts they give away during their life to provide a paper trail for HMRC in case the gifts are investigated after their death.

Svenja Keller, head of wealth planning at Killik & Co, a wealth manager, said she was often approached by people in their eighties looking to manage their affairs to avoid a large IHT bill.

“You’re really running out of options by that point and it becomes almost too late,” she said. “The sweet spot [to take action] is if you’re in your sixties and seventies, although you can even start thinking about planning in your fifties.”

HMRC reported £5.2bn in IHT receipts in 2019/20, recording its first fall in receipts in a decade — partly due to an increase in an IHT exemption called the Residential Nil Rate Band.

Ruth Baker has an urgent deadline. The graphic designer and her husband are desperate to buy a four-bedroom house they have found in Hitchin, Hertfordshire, by mid-January so they can apply for a primary school place for their three-year-old son. First, however, they need to sell their flat in Muswell Hill, north London.

“Houses in Hertfordshire are getting snapped up very quickly,” she says. “And we naively thought our flat would sell easily, too.”

Yet, after almost two months on the market, and despite reducing the asking price by £15,000 to £525,000, they have had five viewings and no offers. “[Our estate agent] hasn’t explicitly said our flat is struggling due to having no outdoor space, but I’m sure it is.”

While the UK property market has experienced a “mini boom” since reopening in May — by October, the average property price was up 7.5 per cent year-on-year, hitting a new record high, according to Halifax bank — the pandemic is causing an increasing number of buyers to shun flats.

In London, the average price of a flat went up by more than any other property type between 2011 and 2019. But over the past 12 months this has been reversed and flats have been the weakest performers.

This year is set to be the first time in more than a decade when flats make up fewer than half of all property sales in the capital, say estate agents Hamptons International. It adds that London flats are taking 70 days to sell on average, whereas houses are taking just 29 days. And that is if they sell.

Separate analysis by PropCast, which maps the housing market, reveals that only 27 per cent of all flats listed for sale are finding buyers, compared with 44 per cent of houses.

Part of this is because of a drop in first-time buyers, who almost always purchase flats. According to property portal Zoopla, the proportion of UK properties bought as first homes has fallen to its lowest level in five years thanks to the economic fallout of coronavirus, and the reduced availability of higher loan-to-value mortgages.

Apartments are losing their appeal at the market’s top end, too. Data company LonRes says the number of flats sold in prime London areas in August and September was 24 per cent lower than in the same period last year, whereas the number of houses changing hands increased by 3 per cent

Indeed, this year houses have made up a higher proportion of prime London property sales than in any year of the past decade. Values of flats sold in these areas are 1.8 per cent lower than a year ago, whereas house prices are 6.1 per cent higher.

The picture is echoed nationally, with houses selling faster than flats for the past six months in Britain’s cities, according to David Fell, senior analyst at Hamptons International. “This is the longest period on record that houses have outperformed flats,” he says. “Buyers are looking for more space in the event of further lockdowns and in order to be able to work more easily and comfortably from home.”

So, what does all this mean for the future of London’s flats? They make up just over half of the capital’s accommodation stock, more than double the proportion anywhere else in the country.

Andrew Groocock, regional partner at estate agents Knight Frank, says it is a matter of size and access to outside space.

“On the whole, flats are not falling out of favour in London,” he says. “But smaller studios or one-bedroom apartments without outside space are challenging in the current market, with the prospect of future lockdowns weighing on buyers’ minds.”

“Having a property with enough space — particularly for a home office — is the most crucial thing on buyers’ minds,” says Henry Sherwood, managing director of The Buying Agents.

As a result, some swanky London flats are being offered for sale with big discounts. A three-bedroom apartment with no outside space, now on sale for £2.2m in Knightsbridge, has been reduced by £1.05m since it was first listed in December last year. A five-bedroom flat in Chelsea is now £1.25m cheaper than its £4m first listing price. “There is still a lot of overpriced stock on the market,” Sherwood says.

One reason for the drop in popularity of pricier flats — such as those in London’s Knightsbridge area — is that Covid-19 is keeping away foreign buyers.

Another reason for the sharp drop-off in the popularity of pricier flats is the fact Covid-19 is keeping away foreign buyers, who have traditionally bought vast swaths of the capital’s new-build apartment stock.

“We are still selling off-plan to buyers from Hong Kong and China up to £1.5m to £2m, but if a property costs more than that they are going to want to look at it in the flesh,” says Ed Lewis, head of residential development sales at estate agents Savills. He adds that sales over £2m to the international market are down about 25 per cent.

Once the pandemic is over, demand for London apartments is expected to return. With the UK government planning to roll out vaccination doses from as early as next month, many hopes that will be sooner rather than later.

Hamptons’ data show that some landlords have already been buying flats — overall London sales to investors were up 65 per cent between June and October, compared with the same period last year, of which almost half were flats

However, Phil Hubbard, professor of urban studies at King’s College London, hopes Covid-19 will reverse the trend of investors and developers creating ever-smaller flats aimed at young professionals and students.

His department’s research shows that the proportion of new housing in London smaller than the government’s recommended national minimum space standard of 37 sq m increased from 5 per cent to 8 per cent between 2015 and 2019.

“Dense urban living may be more environmentally friendly and energy efficient,” Hubbard has said. “But if the price to pay is people living in smaller homes that preclude flexible working and home lives, and also encourage the transmission of Covid-19, or other yet-to-be-known viruses, perhaps the answer is not to continue the rush towards vertical living and micro-apartments.”

Ruth Baker, meanwhile, has asked her estate agent to start contacting buy-to-let investors in a bid to speed up her flat’s sale. “Surely there are people who do still need to go out to work in London and are looking for somewhere to rent?” she says. “Although many of our friends with kids want to leave, not everyone is trying to move out of London.”

Is this the end of the housing ladder?

Many people buy flats because it is all their budget will allow, of course, but are flats still effective as a first rung on the housing ladder?

Not according to Neal Hudson, an analyst at consultancy BuiltPlace. “The housing ladder is finished,” he says. “The idea that you could buy a flat in a city centre and then, after a few years, trade up to get a house in the same area doesn’t work now for the vast majority of people.”

In order to move from a flat to a house, a homeowner requires property-price inflation and the ability to borrow more because their income has increased.

That will not necessarily work, however, if house prices are growing faster than those of flats and incomes are not increasing at a significant rate. In the past year, the average price of a terraced house in London has risen by 5.84 per cent, according to Hamptons, whereas flat prices grew by only 1.74 per cent.

Mortgage broker SPF Private Clients has looked at what this might mean for flat buyers if current trends persist. If a first-time buyer wanted to purchase a two-bedroom flat in Kentish Town, an area of north London, for £450,000, would they be able to trade up to buy a house locally?

It is tricky. Assuming they could first find a 25 per cent deposit, then the £3,340 in buying costs (rising to £10,840 after the stamp-duty holiday comes to an end next March), they would need an annual income of £75,000 to qualify for the mortgage (assuming a 4.5 x salary maximum loan-to-income).

If they then held on to the flat for 9.4 years — which is the average time vendors who sold London flats this year kept them for — the property would be worth £529,218, assuming flat prices rose at 1.74 per cent a year.

Over that time, mortgage payments would be £1,431 a month, which is certainly cheaper than the current typical rent for this kind of property, which is £1,600 — though rents could increase over time.

If the buyer wanted to upgrade to a three-bedroom terraced house in the same area, its price would have risen from £950,000 to £1,619,690, assuming 5.84 per cent annual growth for the 9.4 years.

If they could take the equity out of the flat and pay the buying costs for the move (£108,112 in stamp duty plus total conveyancing and valuation costs of £4,550), then their annual income would have needed to nearly quadruple to £294,598 to qualify for the mortgage.

All this means flat owners hoping to trade up will have to trade out to a cheaper area instead, says Mark Harris, the chief executive of SPF Private Clients.

“Trading out has been a big trend for London flat owners in recent years

and we expect this to become even more pronounced.”

Despite the events of 2020 making investors exceptionally conservative this year, it is predicted that this in fact could lead to a post-pandemic boom in the real estate market.

Emma Hodges | Nov 16, 2020

“Let me just put this out there, we all know it – but COVID-19 has had a significant impact on not just the economy, but our most of our livelihoods,” said Pier Francesco Rocca, Associate Partner at McKinsey & Company, MENA, speaking at Cityscape’s Real Estate Summit 2020.

Indeed, with an estimated 400 million full-time jobs lost in Q3 2020 – a global GDP loss of -4% during the same period – and 67% of employers surveyed by McKinsey & Company maintaining that a WFH (work from home) policy will continue for the foreseeable future, it is easy to see the astronomical impact the 2020 pandemic has had, and will likely continue to have, at least in the short term, on commercial and industrial real estate market.

As a result, Rocca said, some business leaders have become “increasingly conservative about the ability of the economy to rebound… there is agreement that it will go back up, but there is uncertainty about what this path will look like.”

This is not something limited to commercial and industrial projects either, with private real estate transactions or evaluations also being affected. In Dubai, Q2 and Q3 saw a 33% decline in apartment prices, and a 32% decline in the number of transactions for both apartments and villas. Meanwhile, Riyadh was equally hit with -47% transactions for villas, while the prices for apartments saw a smaller decrease, with just -1% in value. Interestingly, however, perhaps in a nod to optimism about the future of the market, the same period saw an upturn in the price for private real estate transactions for villas and townhouses in both cities, with an increase of 25% in Dubai, and a more modest +3% in Riyadh.

STABILISATION OF THE REAL ESTATE MARKET

According to Rocca, this optimism is not misplaced. Due to the finite nature of the 2020 pandemic, he says investors should remember that “most fundamentals of real estate investment are expected to stabilise in the mid-to long-term,” he told attendees. “You look at China, and it is very interesting to see how both the commercial and residential markets over there took just a few months post-crisis to reach the same levels of transactions as before COVID-19.”

Indeed, there is no reason why the GCC real estate market should not experience the same rebound in the mid-to long-term.

“There are currently about one to one and a half trillion dollars of funds that institutional investors have and are ready to deploy,” Rocca concluded. “They just want to know where to put them and are waiting to figure out what happens.”